Ben Graham’s Greatest Gift To Investors

My family is moving this summer. We looked at some houses over the holidays. We found one we liked and the seller suggested a price. Two weeks later, we sent a letter offering to buy the house at the asking price. Probably should have called in Shatner…?

During the two weeks we thought about the house, the Seller didn’t call me back on an hourly, or even daily basis to suggest a different price. She didn’t call us back once.

Ben Graham’s greatest insight and Warren Buffett’s most charitable act to the public investor is the idea of Mr. Market.

Mr. Market even has a wikipedia entry. I won’t bother putting it in my own words…Here is Ben Graham….

Mr. Market is often identified as having human behavioral manic-depressive characteristics, He:

Is emotional, euphoric, moody

Is often irrational

Offers that transactions are strictly at your option

Is there to serve you, not to guide you.

Is in the short run a voting machine, in the long run a weighing machine.

Will offer you a chance to buy low, and sell high.

Is frequently efficient…but not always.

This behavior of Mr. Market allows the investor to wait until Mr. Market is in a ‘pessimistic mood’ and offers low sale price. The investor has the option to buy at that low price. Therefore patience is such an important virtue when dealing with Mr. Market.

I have inserted a spreadsheet area below. These are the roughly 150 companies that I follow on a regular basis. Some are small ($40m) and some are very large ($235B).

The column on the far right is the one to focus on in this post. This column represent the change from the 52 week low to the 52 week high of each company–in other words, the annual change of each company. As you can see, the range of the annual changes in these companies goes from 19% all the way up to 885%. I should point out that none of these companies has been acquired or is subject to a buyout offer, instead these were merely the prices that Mr. Market has quoted to me, and the public market participants, over the past year. And it isn’t just the small companies that experience irrational pricing throughout the year. Neither is the wild mood swings limited to technology or the pharmaceutical space. Here are some examples of well-know companies that are simple to understand, been around for a while, and swing wildly throughout any given year (some companies I will just describe the business):

Big Lots: 103%

Tootsie Roll: 36%

Costco: 43% (Munger has been talking about this company for ten years, so no self-respecting value investor can claim ignorance on this one).

Bed Bath and Beyond: 45%

Disney: 46%

Carmike Cinemas: 51% (movie theater operator in secondary markets)

Lifetime Fitness: 51% (It’s just a gym)

Town Sports: 176% (ditto on the gym thing)

Interactive Brokers: 56% (this company has been written up by at least a half-dozen different value investors that I know of). Incidentally, this stock has moved around 25% in the last 3 weeks.

Whole Foods: 56%

Fair Isaac (FICO scores): 60%

Skilled Nursing Operator: 157%

Numerous Education companies: between 80% and the winner at 885%

Barnes and Noble: 88%

Weight Watchers: 94%

Chicago Bridge and Iron: 176% (Buffett’s protege has been involved in this one, so if you read those filings you know about this one)

Ocwen: 672%

Altisource: 742%

Additionally, this list does not include dividends which would provide even larger range, especially for companies like Costco and Disney.

And the list could go on….and it does below.

A particular painful sin of omission on my part (after some lengthy research) is represented below by a “niche” beverage company currently worth roughly $19B that is up 90% from its lows of last year. Ouch.

Imagine buying a house, where within the span of a year, the Seller’s asking price went from $400,000 to $760,000 (90% change). This happens on an annual basis in the stock market.

What moves market prices…analyst downgrades/upgrades, Greek elections, Congressional oversight panels, regulatory investigations, the constant stream of quarterly earnings, Greek elections, M&A transactions, the price of oil, weather, home prices, employment data, Frozen sales, the Federal Reserve, Putin, executive changes, something about Swiss currencies, data hackers, insider purchases and sales, astrological data, and various other conjectures of the WSJ…. Some things matter, most probably don’t. What is amazing is how much the volatility can be your friend.

You make money in real estate through leverage, but in the stock market, you make money by waiting patiently for Mr. Market’s maniac-depressive mood swings.